A high-risk, high-reward trade on hard-hit Russian stock

By Cody Willard

Ego. Pride. Confidence. These are important traits for anybody, frankly. But they are also your enemy when it comes to trading, investing and analyzing stocks, markets, economies and anything else. I bring this up because I got a great scuttle from a Scutify.com member asking about Yandex and if it’s a contrarian buying opportunity right now.

Posted … 2h ago @CodyWillard Cody, with your contrarian thoughts, don’t you think $YNDX “could” be a steal. I still remember your thoughts on Syria conflicts wherein we got some stocks at bargain. I would hope you do spend some time on $YNDX for the benefit of all of us. Tx.

I’m here to tell you that I was happy to check my ego, my pride and my confidence in keeping up with stock news, markets and economies and immediately set to work doing some deep analysis on Yandex
/quotes/zigman/5262665/delayed/quotes/nls/yndxYNDX. So let’s dig in with some “top down” and some “bottom up” Revolution Investing analysis on Yandex and see where we end up, shall we?

Here’s where my best try at being totally objective about Yandex with my analysis took me from the kernel of the idea to the actual trade.

Yandex’s profile states that, “Yandex N.V. operates an Internet search engine in Russia and internationally. The company offers a range of search, location-based, personalized, and mobile services that enable users to find information, and communicate and connect over the Internet from desktops and mobile devices; and localized homepages for specific geographic markets.”

First off, let me repeat what I’ve long stressed and found over the decades to be true — investing in your own country where you know the laws and have some faith in the markets and the numbers that publicly-traded companies report is hard enough. Staying on top of U.S.-based companies and their place in global Revolution Investment trends is hard enough, no? I typically stray away from foreign-investments, especially “developing market” investments, and having seen most investors lose their shirts at some point in most developing markets cycles over the years, I continue to think it’s wise to keep most of your money invested in domestic companies.

But again, let’s check that premise at the door and see if there’s an opportunity, contrarian or otherwise, to make some money in Yandex.

The contrarian-esque concept to this trade is much like the concept I’ve espoused over the last five years of buying stocks whenever the markets freak out and panic about a geopolitical development. Naveen mentioned my thoughts on the Syria conflicts when I’d repeatedly advised taking advantage of the panic in the markets by buying good stocks that you already believed in but were being sold off in the broader markets’ sell-off.

Take a look at the broad panicky sell-off in the Russian Stock Market Index , the RTS. You can see where it crashed when Russia formally invaded and took over Crimea from Ukraine, in the southwestern region of the former USSR, far from the U.S. where I feel comfortable investing. I write it that way to underscore how far away Yandex and Russia and the conflict in Ukraine is from us here in the U.S. and for me here in Alto, N.M. where I am writing this.

Seeing the White House spoke-squirrel dispense trading advice about Russian stocks makes me all the more bullish from a contrarian standpoint, of course. White House spokespeople words are not exactly “objective” or ever meant to be now, are they? At any rate, there’s clearly a panicky broader market sell-off in the Russian stock market index and our scuttler was right to point out the potential opportunity for us.

Now let’s look at Yandex specifically with what’s called “Bottom up analysis” since we just finished what’s called “Top down analysis.” First off, notice that you can’t use Yahoo Finance’s Analyst Estimate page for YNDX, because it’s not converted back into U.S. dollar figures. But, you can dig down into the actual numbers and see that Yandex has grown their revenue, in U.S. dollars, to more than $1 billion in 2013 and that revenue number is growing about 30% per year.

With YNDX down 40% from its recent highs and not having bounced back nearly as much as the broader Russian stock markets have in the last couple weeks since their initial post-Crimea-takeover crash, its current market cap is $10 billion. Google, which is the leading U.S.-comparable for Yandex, did $170 billion in the last four quarters of sales and that revenue number is growing about 10% per year. GOOG is near its all-time highs and has a market cap right now of $385 billion.

So that means we could buy the “riskier” stock Yandex at a 10x price to sales ratio as the company is growing 33% per year or we could buy Google at a 25x price to sales ratio as the company is growing 10% per year. The P/E difference is similar, as Yandex is trading right now at about 15x next year’s earnings estimates while Google’s trading at about 25x next year’s earnings estimates.

The upshot of all this analysis is that I am indeed willing to take a flyer on some Yandex here as I think the stock will show huge upside over the next few months regardless of what Russia, Ukraine, NATO and the rest of the geopolitical bodies who are causing the current opportunity in Yandex do with each other.

I’m opening up a position in some $YNDX call options by bidding on some call options dated a few months out. If the stock comes back to where it was pre-crisis and/or even is driven higher by strong fundamentals and earnings reports in the meantime, I’ll have big gains in this trade. And if the stock crashes from here or even just stagnates, I’ll likely lose most of any capital I put into these call options. By using call options with strikes near the current stock price, I’m essentially creating a virtual stop loss from the outset of the trade. That is, if I pay $3 for an August YNDX call option with a strike price of $31, that means I’ll have upside exposure as long as the stock is above $34 by next August and that I’d lose all of the capital in those options if the stock were to be below $31 and never get above that before next August. Since you are getting 100 shares for each call option, you’re able to use a small amount of capital to get full exposure to any upside over $34 a share. I didn’t get filled on any of my order yet. I’ll be buying the calls starting Monday next week and will probably keep bidding for them for a few days, as long as the price stays down here.

Remember, if you’re considering using options, they have a finite expiration date, you could (and often will) lose all the money you put into an options trade.

And finally, if you’re not 100% confident in your ability to make an options trade or just aren’t comfortable doing so, you could buy a tiny amount of YNDX common stock and if the stock drops below $27 or so, just sell all of it and thereby try to limit any loss to a minimal 10% from here.

Cody Willard writes Revolution Investing for MarketWatch, posts the trades from his personal account at TradingWithCody.com, which is not affiliated with MarketWatch, and is the largest shareholder in Scutify‘s parent company, Wall Street All-Stars. At time of publication, Cody was net long Google and was getting ready to start buying Yandex call options. Follow Cody on Twitter at twitter.com/codywillard.

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About The Cody Word

Cody Willard writes the Revolution Investing investment newsletter for MarketWatch and posts the trades from his personal account at TradingWithCody.com He is the founder of WallStreetAll-Stars.com and the principal of CL Willard Capital. Cody serves as an adjunct professor at Seton Hall University and is on the University of New Mexico Alumni Board. He was an anchor on the Fox Business Network, where he was the co-host of the long-time #1-rated show on the network, Fox Business Happy Hour. Cody, a former hedge fund manager, and his stock picks and economic outlooks have been featured on NBC’s The Tonight Show with Jay Leno, ABC’s 20/20, CBS Evening News, CNBC’s SquawkBox, Jon Stewart’s The Daily Show, as well as in the Financial Times, Wall Street Journal, New York Times, and many other outlets.